Moody's: Aging populations pose risks to structured deals in Asia Pacific, but mitigating factors evident

Moody's Japan K.K. says that aging populations in Asia Pacific's advanced economies pose some risks in the long term for structured finance transactions, by potentially driving up the average age of underlying borrowers, which can lead to increased risks of delinquencies and defaults, and weighing on the broader economic environment.

"However, any future impact on transactions will likely be minimal due to several mitigating factors, such as the tight eligibility criteria used in deals and the underwriting criteria applied by the originators of the underlying assets," says Naomi Fujiwara, a Moody's Assistant Vice President and Analyst.

"Aging populations can weigh on economic growth and households savings rates. In the absence of offsetting productivity gains, a shrinking labor force, which generally occurs when the population ages, implies a slowdown in real GDP growth," says Christian de Guzman, a Moody's Vice President and Senior Credit Officer.

The largest collateral exposure of the structured finance transactions Moody's rates in Asia Pacific is to Japan and Australia. Korea has one of the largest structured finance markets in Asia Pacific and the country's population is aging rapidly.

"The United Nations expects the proportion of the Japanese population aged 65 and older to climb to 30% by 2030 from 17% in 2000 making Japan the oldest country in the world. Korea's population is aging even more rapidly, while the corresponding rate for Australia is much slower," says de Guzman.

Moody's notes several risks related to older borrowers. They carry higher mortality-related risks -- the risk that people will die before paying off their loans and that a loss will be incurred on the loan as a result.

Older borrowers are also generally less resilient to income shocks than younger employed people. The drop in income in Japan, Korea and Australia becomes pronounced as income earners move into the 60 and above age group. However, in Japan, the drop is smaller in magnitude compared to Korea and Australia, because more elderly people in Japan stay in the workforce and continue to earn wages.

Despite the risks associated with aging populations for structured deals, Moody's report highlights that the performance of Japanese auto loan and installment sales loan asset-backed securities (ABS) has not deteriorated, even though the age of underlying borrowers at closing has been increasing in line with the aging population.

In Korea -- where the proportion of card holders aged 50 and above in credit card ABS that we rate has increased from less than 20% in 2011 to more than 25% in 2017 -- there has been no negative effect on performance, with eligibility criteria preventing less credit-worthy borrowers from being included in securitized pools.

And, in Australia, mortgage lending to older people and retirees is common, but the exposure to retirees in RMBS is very low.

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